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A two-year project has sales of $582,960, cash costs of $411,015, and depreciation expense of $68,109. The tax rate is 24 percent and the discount rate is 12 percent. What amount should be used as the annual depreciation tax shield when computing the project's operating cash flow? Ignore bonus depreciation. C) $47,213.34 D) $26,210.01 E) $46,676.30 B) $16,346.16 A) $23,606.67

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Answer:

B) $16,346.16

Explanation:

annual operating tax shield = depreciation expense x tax rate = $68,109 x 24% = $16,346.16

when you are calculating the net cash flows, the formula you will follow is:

net cash flow = [(revenues - cash costs - depreciation expense) x (1 - tax rate)] + depreciation expense

net cash flow =  [($582,960 - $411,015 - $68,109) x (1 - 24%)] + $68,109 = $147,024.36

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